The Economy and Society

Question 1

Market Failures

Answer 1

when the self-interest that guides our transactions (invisible hand) does not lead to a socially desirable outcomes.

Question 2

Why do markets fail?

Answer 2

1. Externalities
2. Public/private goods issues
3. Information problems (asymmetry)

Question 3

Externalities

Answer 3

the effects of a decision on a 3rd party that are not taken into account by the decision maker

Question 4

Methods for dealing with Externalities

Answer 4

Direct Regulation: government limits the amount of a good we are allowed to use.
- inefficient
Incentives
- Tax: made decision makers internalize the externality
- Market: Cap & Trade
Voluntary Reduction
- Free Rider problem

Question 5

Public Goods

Answer 5

Everyone can use them (nonexclusive)

Consumption by one person does not keep another from consuming it (nonrival)

Question 6

Adverse Selection

Answer 6

buyers and sellers have different amounts of information and use that to the detriment of each other

Question 7

Moral Hazard

Answer 7

people don’t have to bear the negative consequences of their actions.

Question 8

Government

Answer 8

Role as Referee –
Provides a stable set of institutions and rules
Promotes effective and workable competion
Ensures economic stability and growth
Adjusts for undesirable market results
Corrects for externalities
Provides public goods

Question 9

Government Failures

Answer 9

when the government intervenes and makes things worse